(Kitco News) - Renewed buying momentum in the gold market has pushed gold prices to a nearly two-week high as both the U.S. dollar and bond yields fall, as markets continue to shift their expectations regarding the Federal Reserve's aggressive monetary policy stance.
Although gold could continue to struggle as the U.S. central bank will continue to raise interest rates through at least the first quarter of 2023, one precious metals analyst said that the market remains well supported at current prices.
In a recent interview with Yahoo Finance, Suki Copper, executive director and precious metals analyst at Standard Charter, said that physical demand, particularly from India and other Asian nations, is providing solid support for gold, around $1,650 an ounce.
"That price drop that we initially saw below 1,700 was greeted by quite strong physical interest in the gold market. So, the next level to look at from here will be $1,650, and then beyond that is $1,600," Copper said.
India, in particular has seen robust demand for both gold and silver as people prepared for Diwali, the Hindu festival of light. Precious metals are traditionally bought ahead of the celebrations on Oct. 24.
According to anecdotal evidence, India saw record demand for gold and silver over the weekend, leading to Monday's celebrations.
Despite robust physical demand, gold prices still have room to fall to $1,600 an ounce, which Copper said is the low she sees in 2023. However, she added that lower prices would not be sustainable as it would start impacting global production.
"We breach [$1,600], then we're really looking to the cost of production and where that provides a guideline and for the gold market," she said. We tend to see in a long run basis that gold prices tend to trade one-third above the average cost of production. And that guideline suggests to us around $1,550 to $1,600 is where that flow from the production side should materialize."
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Copper said that the Federal Reserve's tightening cycle remains the most significant headwind for gold. The unprecedented rise in the Fed Funds rate continues to support the U.S. dollar near its highest level in two decades, even with Wednesday's selling pressure.
"If both dollar and gold are benefiting from safe-haven demand, we can see them both rally. In the current environment, it's the concerns around slowing demand over the longer term. But concerns around higher rates really weighing on gold," Copper said.
The gold market is seeing some modest gains Wednesday as investors see the Federal Reserve slowing down the pace of its rate hikes after November. However, according to some analysts, the momentum remains fragile as markets are not entirely convinced that the U.S. central bank is ending its tightening cycle.
According to the CME's Fed WatchTool, markets are split 50/50 on whether the U.S. central bank will raise interest rates by 50 or 75 basis points.
Although the pace of rate hikes could slow, markets still see the Fed Funds rate still peaking around 5%, which is still bearish for gold in the near term.
